A: The future looks bright in a rapidly consolidating drugstore industry in which it is a leader.
- Andrew Leckey
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CVS, with more than 6,000 stores, has yet to match the profitability per store of traditional rival Walgreen Co. It is actively replacing many stores within strip malls with more profitable freestanding corner locations to try to narrow that profitability gap.
Meanwhile, discount retailer Wal-Mart Stores Inc. recently rolled out a plan in Florida offering many generic drugs for $4 a prescription. It is expanding that strategy to other states, and neither CVS nor Walgreen has matched it.
CVS definitely hasn't been standing still. This aggressive acquirer recently agreed to buy pharmacy-benefits manager Caremark Rx Inc. in a stock deal worth about $21 billion. The resulting CVS/Caremark would have $75 billion in annual sales and manage a billion prescriptions annually, which is more than one-fourth of the U.S. total.
That shocker of a deal is being watched closely for its impact on the nation's health-care delivery system. CVS already has a small pharmacy-benefits manager and Walgreen has been building its own.
Third-quarter earnings at CVS rose 12 percent, aided by its acquisition of 701 Savon and Osco drugstores in June. Sales at existing stores have been on the rise. Caremark Rx earnings increased 25 percent thanks to additional Medicare services revenue.
Shares of CVS (CVS) are up 3 percent this year following gains of 17 percent last year, 25 percent in 2004 and 45 percent in 2003.
Because it derives 70 percent of sales from dispensing pharmaceuticals, CVS should benefit from growing needs of aging Baby Boomers and the Medicare prescription drug benefit. It has been increasingly successful in using prescription sales to drive purchases of more profitable merchandise such as health and beauty products, groceries and toiletries.
Consensus Wall Street rating of CVS shares is a "buy," according to Thomson Financial. That consists of six "strong buys," six "buys" and seven "holds."
Earnings are expected to rise 12 percent this year versus 10 percent projected for the drugstore industry. Next year's forecast of 23 percent compares to 15 percent expected industrywide. The five-year annualized return of 15 percent exceeds the 13 percent projected for its peers.
Thomas Ryan, chairman, chief executive and president of CVS, began his career at the company as a pharmacist, worked his way through the ranks and owns a significant amount of the firm's shares.
Q: Does purchase of shares of Federated Capital Appreciation Fund make sense right now? -- L.R., via the Internet
A: This fund has undergone significant change at the top in an attempt to improve performance. It may be a bit early to invest.
Carol Miller, with more than two decades of experience in institutional management, became lead portfolio manager a year ago. Former lead manager David Gilmore stepped aside and remains with the fund as a co-manager.
Miller reduced the number of portfolio holdings from 64 to 52 while shifting out of many mega-cap stocks such as Wal-Mart Stores Inc. and Pfizer Inc. in order to buy faster-growing companies.
Gilmore had the misfortune of owning stocks of giant firms during a period in which mega-caps underperformed. But it remains to be seen whether they are poised for resurgence just as this fund has eased out of them.
The $2.2 billion Federated Capital Appreciation Fund (FEDEX) is up 13 percent the past 12 months to rank in the upper one-fifth of large growth and value funds. Its three-year annualized return of 10 percent puts it in the lowest one-fifth of its peers.